Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs)
Everyone including tax preparers is eagerly waiting for more guidance from the government regarding the implementation of Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) in 2014. The Health and Human Services (HHS), Department Of Labor (DOL), and the Treasury Department are releasing rules and regulations on a regular basis these days to help explain parts of the Patient Protection and Affordable Care Act (hereafter, PPACA) affecting job-related health care plans, as well as tax planning, for small business owners and the individual tax payer. Many important tax features in the current Internal Revenue Code will change in definition, complexity, and strategic use. HSAs and HRAs are but two examples of a wide range of areas in business planning that need greater clarification and study.
What is a Health Savings Account?
HSAs include specially designated funds managed by an individual or family intended exclusively for qualified medical expenses. It parallels funds contributed to retirement plans like traditional Independent Retirement Arrangements (IRAs) and Roth 401(k) plans except the tax-deductible contributions must be used to a taxpayer’s health costs. The Internal Revenue Code requires a minimum health insurance deductible from all sources in order to allow the special tax treatment of HSA contributions. These designated funds can accumulate tax-free interest and/or dividends. When applied to qualified medical expenses, their distribution is also tax-free. Thus, HSA annual contributions are like IRA contributions; they are 100% tax-deductible. Any distributions can be deferred indefinitely without tax penalty or required minimum distribution. Refer to 2014 HSA rules and regulations in the June 28, 2010 Federal Register here.
How do HSA limits and thresholds compare in 2014 to 2013?
The upcoming HSA contribution limits and maximum thresholds for out-of-pocket disbursements have increased. In 2014, annual HSA contributions will be $3,300 for self-coverage (individual) and $6,550 for family coverage. These levels compare to 2013 values of $3,250 for single and $6,450 for family coverage. The High Deductible Health Plan (HDHP) deductibles remain the same in 2014 compared to 2013; they are $1,250 and $2,500 for self-only and family coverage respectively. The 2014 inflation adjusted amounts for HSAs as determined under § 223 of the Internal Revenue Code can be referenced here.
Out-of-pocket over the course of one-year can include insurance deductibles, co-payments and amounts not including actual premiums. In 2014, these maximums are $6,350 and $12,700 for self-only and family respectively. In 2013, they are $6,250 and $12,500 for self-only and family respectively.
Individuals who draw down (distribute) funds for payment of non-specific, unqualified, or non-medical expenses face a 20% tax penalty.
What is a Health Reimbursement Arrangement?
A Health Reimbursement Arrangement (HRA) is a special financial account established by employers to reimburse employees for their medical expenses. It is called a notional account because employer contributions are ‘noted’ but not necessarily released to employees. Records of committed funds are kept on behalf of employees in advance of any specific qualified medical disbursement. A notional account means that an employer will reimburse their employee only after medical expenses are paid. HRAs, unlike an HSA, are not established by employees nor linked to a HDHP. Another HRA difference is in funding; these arrangements do not allow employees or outside third parties to make contributions to them.
How is an HRA similar to and different from an HSA?
Employer contributions to both HRA and HSA are tax-deductible. The HRA is far more advantageous to employers because they determine the maximum contribution and disburse funds on demand. Payments exactly match the employee’s specific medical costs making administration easier compared to cafeteria plans or other health cover programs.
An employer excludes HRA from employee wages. The employee treats their own HSA contributions like money independently contributed to an IRA except HSA contributions are tax-free rather than tax-deferred. The HSA funds are portable (from employer to employer) as long as distributions are applied to qualified medical expenses.
Both HSA and HRA funds are “consumer-directed” in that the employee determines to whom, how, where, and when medical expenses are paid. Unused funds will accumulate over time.
What is an integrated HRA?
If an HRA is part of other coverage included in a group health plan compliant with PPACA rules and regulations, it is considered integrated and allowed. The guidance regarding the implementation of rules for group health plans under PPACA is based on documentation originally published in the Federal Register cited above.
Will HRAs be allowed in 2014?
No guidance has not been issued to date regarding HRAs in 2014. Recent information from Health and Human Services (HHS), Department Of Labor (DOL), and the Treasury Department suggest that if an HRA is not part of a health coverage plan, it will not be allowed after January 1, 2014 because PPACA does not allow any annual dollar limits on essential health benefits. By definition, an HRA would conflict with this rule because it can potentially provide individual market coverage or health plans or alternatively offer credits to anyone not enrolled in other medical programs. Permissibility under PPACA will depend on whether or not the HRA is integrated into the group health plan coverage.
Some other recent references to 2014 changes to HSAs and HRAs:
HRA, HSA and FSA – Changes Under Health Reform | NorthWest …
The Affordable Care Act (known as ACA or health reform) was signed into law in 2010 and impacts many areas of health care and health insurance, including medical reimbursement programs such as HRAs, HSAs and FSAs. … Beginning January 1, 2014: HRAs may need minor plan design changes to be ACA-compliant in 2014. HRAs will need to meet one of these five types of HRAs that are excluded from annual limit requirements outlined in health reform laws …
[Intercare Compliance Advisory] IRS Announces 2014 HSA/HDHP …
The Internal Revenue Service recently released 2014 inflation-adjusted figures for contributions to health savings accounts (“HSAs”) and the minimum deductible and maximum out-of-pocket limits for accompanying high deductible … Your employees do not become ineligible for an HSA if you only offer (i) a limited purpose health FSA or limited purpose health reimbursement account (“HRA”) (i.e., one that pays or reimburses only permitted coverage such as vision or …
HSAs vs HRAs (Savings Accounts vs Reimbursement Arrangements)
Comparing HSAs vs HRAs… For most businesses, HRAs are superior to HSAs – Which is better for you? HRA or HSA. … 2013 9:46 AM by Corky Bradley. I believe Plans lose grandfathered status in 2014. <<Also, if you review …